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Creditors also face risks of a
trustee retirement, removal and the
appointment of a new trustee.
Discretionary trust deeds often
allow an appointor to remove a
trustee in the event of the trustee
being placed into liquidation or
when a receiver is appointed. In
unit trusts, the unit holders
(holders of issued units) may by
unanimous vote at a duly convened
meeting remove a current trustee or
appoint a new trustee. In some trust
deeds, we have noted the trustee’s
role is automatically vacated as
trustee on the occurrence of such
events.
Recourse available
Section 197 of the Corporations Act
2001 (Cwth) limits creditors’
recourse to trust assets. A
Director(s) acting as trustee would
not be fully indemnified against
liability out of trust assets where
there has been a breach by the
trustee, or trustee has acted
outside the scope of its powers or
there is a term in the trust deed
denying or limiting the trustee’s
indemnity. Hence the Director(s)
could be personally liable or
jointly with the company if no
indemnity prevails.
Where personal guarantees have been
given by the Directors, who are also
beneficiaries of the trust and
recipients of trust income, this
mitigates the creditors’ risks.
However, there is no assurance that
the Directors’ individual assets
would cover liabilities incurred in
the event of legal proceedings taken
against them jointly or severally.
Section 36 of the Trustee Act 1958
(Vic.) provides an implied indemnity
to trustees but this extends only to
expenses incurred in the execution
of the trust. Section 45(1) of the
Trustee Act 1958 (Vic.) states that
property vests in the new trustee
upon its appointment,
as joint tenants with the previous
trustee for the purposes of the
trust, however, this does not apply
to land conveyed by way of mortgage
for securing money subject to the
trust (Section
45(3)).
Also under Section 37 of the
Transfer of Land Act 1958 (Vic.),
the legal owner of the property is
the trustee company acting for the
trust that owns the property. Hence,
mortgagees of trust property can
still exercise their right over
mortgaged property even though the
trustees have been removed or
replaced.
What if a creditor holds a fixed and
floating charge over a company
acting as trustee of a trust? Would
removal of the trustee, and
appointment of a new trustee,
frustrate the creditor’s right of
subrogation and result in the
creditor becoming unsecured (trust
assets now held by a new trustee)?
Extent of creditors’ subrogation
rights
In Octavo Investments Pty Ltd v
Knight [1979] HCA 61, the dispute
was
whether a
trustee's interest in property will
pass to the bankruptcy trustee for
the benefit of the creditors should
the trustee become bankrupt.
The underlying principles provided
by the High Court, supported by
other previous High Court decisions,
in respect of a trustee’s right to
be indemnified out of the trust
assets are
as follows:
creditors
right of subrogation in the event of
a distribution of trust assets
prevails over the beneficiaries (or
cestuis que trust) due to a charge
or right of lien in favour of the
trustee until the charge has been
satisfied (Vacuum Oil Co. Pty. Ltd.
v. Wiltshire [1945] HCA 37);
the beneficial interests which, by
subrogation (to the creditors) form
part of the property of the bankrupt
divisible amongst his creditors
(Savage v. Union Bank of Australia
(1906) 3 CLR);
the fact that creditors have no
direct recourse to trust property
itself by virtue of their security
does not matter; those creditors are
nevertheless subrogated to the
rights of the trustee in relation to
that property;
thus once a trustee has incurred
liabilities in the performance of
the trust then the trustee is
entitled to be indemnified against
those liabilities out of the trust
property and for that purpose, is
entitled to retain possession of the
property as against the
beneficiaries;
What conclusions can we draw from
the above?
A trustee company that is fraudulent
or “ultra vires” would not be
entitled to
indemnity against those liabilities
out of the trust property. A
trust deed appointing a trustee must
contain all the necessary powers to
ensure the trustee, in its fiduciary
capacity, is acting in the interests
of the beneficiaries. Removal of a
trustee should not frustrate
creditors provided the trustee’s
liabilities were incurred in
carrying out powers given to it
under and for the purposes of the
trust.
In enforcement of securities,
recovery of assets from the trustee
named as the security provider is
expected to be unchanged despite the
transfer of assets to the new
trustee.
Recommendation
There is scope for creditors to
“tighten-up” their agreements or
deeds of covenants to ensure any
removal or replacement of trustee
will preserve existing securities
held by a creditor and for the new
trustee to accept this as part of
the transfer of engagements in
establishing the new trustee.
The above article is not an
exhaustive view of the subject
matter covered, for more
information, please contact:
Sebastian
Saccuzzo, Partner
T:
03 9609 1596 F: 03 9609 6796 E:
ssaccuzzo@rk.com.au
Roderick
Tan, Solicitor
T:
03 9609 1678 F: 03 9609 6878 E:
rtan@rk.com.au |
